This copy is for your personal non-commercial use only. To order presentation-ready copies of Toronto Star content for distribution to colleagues, clients or customers, or inquire about permissions/licensing, please go to: www.TorontoStarReprints.com

Thinking of GICs? You can do better

It’s been almost four years since the stock market hit rock bottom on March 9, 2009 but for many people it seems like yesterday. They haven’t forgotten the financial trauma of the credit crunch that wiped out billions of dollars of shareholder value and almost destroyed the U.S. banking system.

The psychological scars linger to this day. I receive a steady flow of e-mails from people asking where they can invest money risk-free and earn a decent rate of return. The answer in this era of low interest rates is nowhere.

As a result, many people are reverting to that old stand-by, guaranteed investment certificates (GICs). Sure the return is low (2.15 per cent at Royal Bank for a five-year non-redeemable certificate). But the bank guarantees repayment of full principal and interest and there’s the added protection of the Canada Deposit Insurance Corporation which covers assets up to $100,000. That level of safety is the main reason why people are using GICs for everything from RRSPs to non-registered investment accounts.

Okay, it’s time for full disclosure: I am not a big fan of GICs. There are three reasons. First, after inflation and taxes are taken into account any real return is negligible. Second, locking in for five years when rates are already starting to inch higher is bad financial strategy. Third, I believe there are better choices.

Article Continued Below

Last year about this time I suggested two alternatives to GICs, one for ultra-conservative investors and one for those who were willing to take on a little more risk.

My conservative pick was National Bank Mortgage Fund. It’s one of the few mutual funds in Canada that has never lost money over a 12-month period and I figured it would perform better than a short-term GIC.

Well, the fund’s loss-free record is still intact but it did not have a great year. According to Morningstar.ca, it squeaked out a gain of only 0.47 per cent over the year to Jan. 28. That was the worst 12-month performance since the fund was launched in 1991. Your money was preserved, as I said it would be, but in this case the GIC would have given you a better return.

My other suggestion — the one that asked you to be a little more adventuresome — fared much better. That was to buy shares in pipeline giant and natural gas distributor Enbridge Inc. (TSX: ENB). At the time the column appeared, the stock was trading at $37.37. As of Jan. 28, the price was $44.55 plus we received $1.13 in dividends over the year for a total return of 22.2 per cent. That’s way better than a GIC and it shows the pay-off potential of a little more risk.

So what should the cautious investor be considering this year? As a starting point, keep in mind that many experts believe that bonds are more risky than stocks right now. That’s because even though central banks are standing pat, commercial interest rates are moving higher. That is bad news for bond funds, many of which posted negative returns in January. As of Jan. 28, the DEX Universe Bond Index, which tracks a broad spectrum of federal, provincial, and corporate bonds, was off 0.56 per cent for 2013.

Even a low-risk short-term bond fund like National Bank Mortgage Fund will suffer in this situation. So a bond fund is not the answer. Instead, I recommend a conservatively managed balanced fund that is almost equally divided between stocks and bonds.

Fidelity Monthly Income Fund is an example. It has been a first-quartile performer (top 25 per cent of all funds of its type) every year but one since 2006. It gained 7.9 per cent over the year to Jan. 28 and was showing a three-year average annual compound rate of return of 8.8 per cent to that point. Monthly distributions provide some cash flow but not a lot — usually around $0.02 per unit.

This is not a risk-free fund – stick with the GICs if that’s what you want. But the risk is low in relation to the higher return potential.

For a stock pick, I still like Enbridge but Newfoundland-based utility Fortis Inc. (TSX: FTS) is another sound choice for risk-adverse investors. Fortis serves more than two million gas and electricity customers in five provinces and two Caribbean countries and owns a natural gas utility in British Columbia. It has a long history of annual dividend increases (40 consecutive years and counting) and the company recently announced its latest hike, moving the quarterly payment to $0.31 a share ($1.24 annually), up 3.3 per cent. The yield based on the increased dividend is 3.6 per cent. The share price dipped during the 2008-09 downturn but recovered quite quickly and is now well above its pre-crash trading price.

Ask a financial adviser if any of these securities is appropriate for your needs. And stop being so worried! The world isn’t going to end this year.

Clarification: In my last column, I discussed the increase in passport fees this year. I should have added it does not take effect until July 1 so if you need a new passport, get it before then.

Gordon Pape is editor and publisher of the Internet Wealth Builder newsletter. His website is www.BuildingWealth.ca

Delivered dailyThe Morning Headlines Newsletter

The Toronto Star and thestar.com, each property of Toronto Star Newspapers Limited, One Yonge Street, 4th Floor, Toronto, ON, M5E 1E6. You can unsubscribe at any time. Please contact us or see our privacy policy for more information.

More from the Toronto Star & Partners

LOADING

Copyright owned or licensed by Toronto Star Newspapers Limited. All rights reserved. Republication or distribution of this content is expressly prohibited without the prior written consent of Toronto Star Newspapers Limited and/or its licensors. To order copies of Toronto Star articles, please go to: www.TorontoStarReprints.com